Understanding Federal Tax Deductions and Credits

If you have a low or moderate income, the Earned Income Tax Credit (EITC) can be a great way to reduce the amount of taxes you owe. To be eligible, you must meet certain requirements and file a tax return. Even if you don't owe any taxes or aren't required to do so, you still need to file a return to be eligible for the EITC. If the EITC lowers your taxes to less than zero, you may receive a refund. The Child Tax Credit (CTC) is another way to reduce the amount of money you owe on your federal taxes.

To qualify, you must meet certain requirements and file a tax return. The amount of money you can deduct from your taxes may not equal the total amount of your donations. You may not have to submit these documents with your tax returns, but it's good to keep them together with your other tax records. The Mortgage Interest Deduction reduces the federal income tax paid by eligible homeowners by reducing their taxable income by the amount of mortgage interest they pay. Your tax software or tax advisor can run your return both ways to see which method produces a lower tax bill.

In general, you can deduct qualified, unreimbursed medical expenses that represent more than 7.5% of your adjusted gross income for the tax year. Detailing allows you to reduce your taxable income by taking any of the hundreds of available tax deductions that you qualify for. As the simplified example in the table shows, a tax credit can affect your tax bill much more than a tax deduction. Tax deductions and credits are powerful tools that can help you save money on your taxes if you know how to use them correctly. Knowing what deductions and credits are available, how they work, and how to get them can help you maximize your savings.